What’s Money Worth? Gold Standard Myth

A friend brought by some old silver certificate bills and asked me how he could exchange them for silver. When I explained that he couldn’t, he said the thought that money was backed by the gold and silver in Fort Knox. While it is true that at one time it was, the US government stopped backing the dollar with an actual gold supply in 1971 and all other major currencies have also stopped backing their money with gold since then (this is referred to as “leaving the gold standard”). While many people still believe that the dollar and other currencies are backed with gold, this is a myth.

This, not surprisingly, lead to the question “If there is no gold to guarantee the money, then what is it worth?” and he was a bit taken aback when I said “it’s worth the paper that it’s printed on.”

Of course, that is a bit deceiving. While a dollar may not literally have any value, the US currently has a stable monetary system in place where people are willing to trade these dollar bills for goods and services. Could this change to where people no longer are willing to do this? Yes, there is that possibility, but it doesn’t seem likely to happen in the near future.

Then again, since the entire system is currently based on a widely held belief among everyone, it isn’t guaranteed the system will last forever. As economists Milton Friedman and Anna Schwartz say in A Monetary History of the United States:

“Each accepts them (the pieces of paper – dollars) because he is confident others will. The pieces of green paper have value because everybody thinks they have value, and everybody thinks they have value because in his experience they have value.

It is important to point out the affect of international trade on the value of the dollar. The fact that the dollar for years has been highly desired internationally has helped continue to prop up the value of the dollar.

For example, oil is traded with dollars in international markets, so if countries want to buy oil, they first have to get dollars. Same for gold.

Also, while many countries have gone away from the gold standard, many have replaced gold back currency with U.S. dollar backed currency, meaning they hold dollars in reserve instead of gold to support the value of their own currency. The impact of this (as well as the need for dollars to trade gold and oil) is that there is a huge international demand for the U.S. dollar.

If these factors ever change, it would dramatically affect the value of the dollar. Some countries have already suggested that oil and gold be traded in Euros. China holds a huge amount of dollars in reserve. I don’t have a source readily available, but I seem to remember that China has been selling dollars to buy gold.

If we continue to piss off other countries, it seems likely to me that they will wise up and starting trading in Euros, and we will all be left with huge stacks of near worthless paper.